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Heir Tonic for Charities

By

Arthur C. Brooks

Updated Sept. 13, 2005 12:01 a.m. ET

The estate tax seemed to be cruising toward inevitable demise. A Senate vote was expected around Labor Day, and the GOP appeared close to the 60 votes needed to permanently abolish taxes on inheritances. Katrina has set the vote back by at least a few weeks, as the Senate attends instead to legislation authorizing relief funds to the Gulf Coast. The hurricane has also provided an argument against repeal to Democratic National Committee Chairman Howard Dean. He compared beneficiaries of repeal with hurricane victims, asking, "Shall we give [the estate tax revenues] to the wealthiest people in the country, or should we rebuild New Orleans?" The argument is a progressive classic: Not taxing the rich is the same as taking from the poor.

As flawed as the logic might be, it is worth considering how much it will cost taxpayers if the tax is repealed, and what it means for the economy. Estimates place the annual federal revenues from the estate tax at $20 billion. This would certainly make a dent in hurricane recovery efforts -- if it were all used for that purpose.

A more realistic link between the tax and disaster relief is through charitable contributions. Americans bequeath $20 billion every year to nonprofits, including organizations that provide relief to disaster victims. Opponents of repeal note that doing so removes a powerful philanthropic motive, because the portion of an estate willed to charity is tax-exempt. The CBO estimates that a 10% decrease in the estate tax would stimulate a decrease in charitable bequests of 4.2%. This suggests that a repeal of the tax would, by itself, lower charitable giving by $8 billion annually. Many nonprofits have lined up against abolition of the tax for this reason.

In making their case, however, nonprofits employ a tortured logic: Our organization supports the estate tax so that your family will continue to try to avoid it by giving us money. Instead, charities should focus less on the incentives of people making bequests, and more on the incentives of people receiving them.

What can we expect heirs to do with their money, if less of it is taken by the IRS? Data show that people tend to contribute a higher proportion of inherited wealth than they do other kinds of wealth (e.g., from stocks or real estate). If the estate tax is repealed, this extra charitable giving will likely come to at least $750 million per year. In the short run, giving by private heirs will not make up entirely for the loss of charitable gifts by their parents if the estate tax is repealed, but this effect is still considerable. And the amounts given annually are not fixed -- heirs may be convinced to give more.

When all is said and done, the Senate will most likely repeal or greatly reduce the estate tax without too much consideration of the interests of the nonprofit sector. This does not spell doom for charities, however. The key is not to focus on how the tax system can be used to get more money from the dead, but rather to look to the future and find ways to increase giving -- for humanitarian relief and other worthy causes -- among a new generation of heirs.

Mr. Brooks, associate professor at Syracuse University's Maxwell School of Public Affairs, is writing a book on American charity, to be published next year by Basic Books.